SEC News Digest

Commission Announcements

On Feb. 24, 2011, the Securities and Exchange Commission charged two securities professionals, a hedge fund trader, and two firms involved in a scheme that manipulated several U.S. microcap stocks and generated more than $63 million in illicit proceeds through stock sales, commissions and sales credits.

The SEC alleges that Florian Homm of Spain and Todd M. Ficeto of Malibu, Calif., conducted the scheme through their Beverly Hills, Calif.-based broker-dealer Hunter World Markets Inc. (HWM) with the assistance of Homm’s close associate Colin Heatherington, a trader who lives in Canada. They brought microcap companies public through reverse mergers and manipulated upwards the stock prices of these thinly-traded stocks before selling their shares at inflated prices to eight offshore hedge funds controlled by Homm. Their manipulation of the stock prices allowed Homm to materially overstate by at least $440 million the hedge funds’ performance and net asset values (NAVs) in a fraudulent practice known as “portfolio pumping.”

The SEC additionally brought administrative proceedings against HWM’s trader and chief compliance officer, who each agreed to settle the SEC’s charges against them.

“Ficeto and Homm repeatedly abused their positions as securities industry professionals to commit a wide-ranging, cross-border fraudulent scheme,” said Rosalind R. Tyson, Director of the SEC’s Los Angeles Regional Office. “By manipulating U.S. stocks through a U.S. broker-dealer, they defrauded investors in offshore hedge funds and reaped millions of dollars from their illicit activities.”

According to the SEC’s complaint filed in the U.S. District Court for the Central District of California, Homm along with Ficeto and Heatherington conducted the scheme from September 2005 to September 2007. Homm misused the assets of the hedge funds to allow him, Ficeto, Heatherington and HWM to manipulate upwards the prices of the U.S. microcap stocks in which the hedge funds held a position. They used a number of classic manipulative techniques such as placing matched orders, placing orders that marked the close or otherwise set the closing price for the day, and conducting wash sales. This manipulation enabled Ficeto, Homm and Heatherington to generate enormous profits through Ficeto’s and Homm’s co-ownership of HWM and their sale of the microcap stock shares to the hedge funds at inflated prices. Ficeto garnered further illicit profits through his control of Hunter Advisors LLC, which directed the investment activities of a “fund of funds” that also participated in the stock manipulation.

The SEC’s complaint alleges that the principal traders at HWM and the London-based hedge funds manager Absolute Capital Management Holdings Limited (ACMH) exchanged hundreds of instant messages (IMs) that were recorded on a secret, alternate messaging system that allowed them to communicate freely without fear that their scheme would be detected by the SEC. As reflected in those secret IM messages, ACMH’s trader (typically Heatherington) under Homm’s direction would instruct Ficeto or HWM’s trader (Tony Ahn) acting under Ficeto’s direction to place matched orders, transactions that marked the close, or wash sales for the purpose of artificially raising or stabilizing the microcap stock prices.

The SEC’s complaint charges Ficeto, Homm, Heatherington, HWM, and Hunter Advisors LLC with violating the antifraud provisions of the federal securities laws, and additionally charges HWM and Ficeto with violations of several broker-dealer recordkeeping provisions. The SEC seeks permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and financial penalties. The SEC also seeks an order permanently barring Ficeto from participating in any penny stock offering or from serving as an officer or director of a public company.

The SEC instituted separate but related administrative proceedings against Ahn and HWM’s former chief compliance officer Elizabeth Pagliarini, who each agreed to settle their cases without admitting or denying the SEC’s findings. Ahn agreed to pay a $40,000 penalty, comply with certain undertakings, and be barred from association with a broker and dealer for five years. Pagliarini agreed to a $20,000 penalty and one-year suspension as a supervisor with a broker or dealer.

Commission Meetings

Closed Meeting on Monday, February 28, 2011 at 10:30 a.m.

The subject matter of the Closed Meeting scheduled for Monday, Feb. 28, 2011, will be: institution of administrative proceedings.

At times, changes in Commission priorities require alterations in the scheduling of meeting items. For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact: The Office of the Secretary at (202) 551-5400.

Enforcement Proceedings

In the Matter of Tony Ahn

On Feb. 24, 2011, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions (Order) against Tony Ahn.

The Order finds that Tony Ahn (Ahn) willfully violated, and willfully aided and abetted violations of, the antifraud and the broker-dealer record-keeping requirements of the Securities Exchange Act of 1934 (Exchange Act). Between August 2005 and May 2008, Ahn was associated with, and was the primary trader for, Hunter World Markets, Inc. (HWM), a now defunct broker-dealer that had previously been registered with the Commission. Between September 2005 and September 2007, Ahn, the co-owners of HWM, Todd M. Ficeto (Ficeto) and Florian Homm (Homm), as well as Colin Heatherington (Heatherington), manipulated upwards the stock price of several microcap issuers. Ficeto, Homm, Heatherington, and Ahn manipulated these stocks in order to artificially increase the net asset value of the now defunct hedge funds that Homm effectively controlled, and where Heatherington worked on behalf of Homm.

The Order finds that, as HWM’s primary trader, Ahn executed numerous trades that manipulated upwards the price of several microcap stocks. Ahn received the hedge funds’ trade orders from Heatherington. Ahn would often communicate with Heatherington via an online instant messaging system in which they openly discussed trade orders. HWM did not properly preserve records of these instant messages as it was required to do under Section 17(a) of the Exchange Act. Some of the methods Ahn, Heatherington, Homm, and Ficeto used to accomplish the price manipulation included matched orders between the various hedge funds, marking the close in shares of several of the microcap companies, and wash trades between accounts held in the names of the same individual funds.

The Order finds that, as a result of the conduct described above, Ahn willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, willfully aided and abetted and caused HWM’s violations of Section 15(c)(1) of the Exchange Act, and willfully aided and abetted and caused HWM’s violations of Section 17(a) of the Exchange Act and Rule 17a-4(b)(4).

Based on the above, the Order bars Ahn from association with a broker or dealer with a right to reapply for association after five (5) years and requires him to pay a civil penalty of $40,000. Also, Ahn is ordered to cease and desist from committing or causing any violations and any future violations of Sections 10(b), 15(c)(1) and 17(a) of the Exchange Act and Rules 10b-5 and 17a-4(b)(4) thereunder. Ahn consented to the issuance of the Order without admitting or denying any of the findings in the Order. (Rel. 34-63963; File No. 3-14272)

In the Matter of Elizabeth Pagliarini

On Feb. 24, 2011, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions (Order) against Elizabeth Pagliarini.

The Order finds that Elizabeth Pagliarini (Pagliarini) failed reasonably to supervise Tony Ahn (Ahn), a registered representative who, between September 2005 and September 2007 helped manipulate the prices of several microcap issuers’ stocks. During this time, Ahn was associated with Hunter World Markets, Inc. (HWM), a now defunct broker-dealer that was formerly registered with the Commission, and for which Pagliarini was the designated compliance officer, as well as Ahn’s direct supervisor. Ahn violated Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and aided and abetted and caused HWM’s violations of Section 15(c)(1) of the Exchange Act, by executing a number of trades, including wash trades, the apparent purpose of which were to manipulate the prices of microcap issuers’ stock and to generate over $600,000 in sales credits to HWM. Pagliarini failed reasonably to supervise Ahn because she failed to follow HWM’s procedures that required her to follow up on suspicious transactions, such as the wash trades, that lacked business sense or exhibited a lack of concern regarding risks, commissions, or other transaction costs.

The Order finds that Pagliarini also willfully aided and abetted and caused HWM’s violation of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder, which requires brokers and dealers to comply with the recordkeeping, retention, and reporting obligations imposed by the Bank Secrecy Act. Specifically, HWM failed to file, and Pagliarini failed to cause the firm to file, any suspicious activity reports with respect to several transactions, including several large money transfers into and out of the brokerage account of Florian Homm, one of HWM’s co-owners at the time; a large transfer of funds to a third party account at a Canadian bank by Colin Heatherington, who worked for Homm; and with respect to the suspicious wash trades described above.

Based on the above, the Order suspends Pagliarini from acting in a supervisory capacity with any broker or dealer for a period of twelve months and requires her to pay a civil penalty of $20,000. Also, Pagliarini is ordered to cease and desist from committing or causing any violations and future violations of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder. Pagliarini consented to the issuance of the Order without admitting or denying any of the findings in the Order. (Rel. 34-63964; File No. 3-14273)

On Feb. 25, 2011, the Commission revoked the registration of each class of registered securities of Magna Entertainment Corp. (n/k/a Reorganized Magna Entertainment Corp.) (MECAQ) for failure to make required periodic filings with the Commission.

Without admitting or denying the findings in the Order, except as to jurisdiction, which it admitted, MECAQ consented to the entry of an Order Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934 as to Magna Entertainment Corp. (n/k/a Reorganized Magna Entertainment Corp.) finding that it had failed to comply with Section 13(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 13a-1 and 13a-13 thereunder and revoking the registration of each class of MECAQ’s securities pursuant to Section 12(j) of the Exchange Act. This Order settled the charges brought against MECAQ in In the Matter of ActiveCore Technologies, Inc., et al., Administrative Proceeding File No. 3-14231.

Brokers and dealers should be alert to the fact that Exchange Act Section 12(j) provides, in pertinent part, as follows:

No member of a national securities exchange, broker, or dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security the registration of which has been and is suspended or revoked . . . .

Self-Regulatory Organizations

Immediate Effectiveness of Proposed Rule Changes

A proposed rule change filed by NYSE Arca (SR-NYSEARCA-2011-04) to eliminate the requirement of an 80% supermajority vote to amend or repeal Section 3.1 of the Bylaws has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of February 28. (Rel. 34-63942)

A proposed rule change filed by NYSE Amex (SR-NYSEAMEX-2011-06) to eliminate the requirement of an 80% supermajority vote to amend or repeal Section 3.1 of the Bylaws has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of February 28. (Rel. 34-63943)

Proposed Rule Changes

The Commission issued a notice of filing of a proposed rule change by the Municipal Securities Rulemaking Board (MSRB) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934, consisting of amendments to Rule G-23, on activities of financial advisors (SR-MSRB-2011-03). Publication is expected in the Federal Register during the week of February 28. (Rel. 34-63946)

The Commission issued a notice of filing of a proposed rule change by the Municipal Securities Rulemaking Board (MSRB) pursuant to Section 19(b)(2) of the Securities Exchange Act of 1934, consisting of amendments to the MSRB’s Short-term Obligation Rate Transparency (SHORT) subscription service to provide subscribers with additional information as well as documents (SR-MSRB-2011-04). Publication is expected in the Federal Register during the week of February 28. (Rel. 34-63950)

Accelerated Approval of Proposed Rule Changes

The Commission approved on an accelerated basis a proposed rule change by BATS-Y Exchange (SR-BYX-2011-002) to amend BYX rules in connection with the implementation of amendments to Regulation SHO. Publication is expected in the Federal Register during the week of February 28. (Rel. 34-63947)

The Commission approved on an accelerated basis a proposed rule change by BATS Exchange (SR-BATS-2011-002) to amend BATS rules in connection with the implementation of amendments to Regulation SHO. Publication is expected in the Federal Register during the week of February 28. (Rel. 34-63948)

Securities Act Registrations

The following registration statements have been filed with the SEC under the Securities Act of 1933. The reported information appears as follows: Form, Name, Address and Phone Number (if available) of the issuer of the security; Title and the number and/or face amount of the securities being offered; Name of the managing underwriter or depositor (if applicable); File number and date filed; Assigned Branch; and a designation if the statement is a New Issue.

Amendments to the Registrant's Code of Ethics, or Waiver of a Provision of the Code of Ethics

5.06

Change in Shell Company Status

6.01

ABS Informational and Computational Material.

6.02

Change of Servicer or Trustee.

6.03

Change in Credit Enhancement or Other External Support.

6.04

Failure to Make a Required Distribution.

6.05

Securities Act Updating Disclosure.

7.01

Regulation FD Disclosure

8.01

Other Events

9.01

Financial Statements and Exhibits

8-K reports may be viewed in person in the Commission's Public Reference Branch at 100 F Street, N.E., Washington, D.C. To obtain paper copies, please refer to information on the Commission's Web site at http://www.sec.gov/answers/publicdocs.htm. In most cases, you can view and download this information by using the search function located at http://www.sec.gov/edgar/searchedgar/companysearch.html.